G.M. Reports Progress in Returning to Profitability but Also Sees Problems

By DANNY HAKIM and JEREMY W. PETERS

Published: August 31, 2005

General Motors executives told financial analysts yesterday that they were making progress in their efforts to become profitable again, but that rising gas prices and continuing negotiations over labor costs were complicating the company's comeback bid.

The executives said that sales of G.M.'s large sport utility vehicles, which have been a crucial profit center, will not return to their past levels. The company is also shifting its view on gas prices. After saying for months that rising prices were not a factor in softening demand for such vehicles, they now say the prices are having an effect.

Executives at the briefing offered few details about G.M.'s talks with the United Auto Workers union. G.M. has been pressing the union to agree to concessions in health care benefits, but talks between the two sides have been complicated by the emergence of a third party, Delphi, a supply giant that is a former division of G.M.

Delphi's new chief executive, Robert S. Miller, has threatened to file for bankruptcy protection unless G.M. and the union agree to what could amount to a costly bailout. A bankruptcy declaration by Delphi could be devastating for G.M. because the company would have to assume billions of dollars in costs for many of its former workers. And any disruption in Delphi's parts production could halt production of any number of G.M. vehicles.

''Delphi is very important to us and we obviously want to be as constructive as we can,'' said John M. Devine, G.M.'s chief financial officer, in the briefing with financial analysts in Detroit yesterday. ''That said, we obviously are going to do what's best for General Motors.''

Both G.M. and Delphi are also seeking concessions on labor costs from the union, particularly regarding health care. A newsletter this week, published by a union local in the Detroit suburb of Warren, Mich., shed new light on the talks. G.M. has sought as much as $20 billion in cuts to its future medical liability of more than $60 billion for retirees. The newsletter said that top union leaders have told both G.M. and Delphi ''that the union cannot and will not meet their demands.''

But several union officials have said that the union and G.M. have progressed beyond G.M.'s initial demands after a few months of discussions and said a strike was less likely than a settlement.

The newsletter also quotes the union's top negotiator, Richard Shoemaker, as saying, ''It would not be in our best interest to walk away if there is something we can do that would help G.M. through this difficult period and prevent a larger problem down the road.''

Details from the newsletter were previously reported by Bloomberg News and The Detroit Free Press. Officials at the union, G.M. and Delphi declined to comment on its contents.

In addition to pressuring G.M., Delphi seeks sweeping wage and health benefit cuts from the union, including an end to medical benefits for retirees who are eligible for Medicare. They also want the ability to close plants without union approval, the newsletter said. As part of the three-way talks, the union wants 7,000 Delphi workers to be able to return to G.M., which would hinder G.M.'s plans to cut its labor force.

John A. Casesa, an analyst at Merrill Lynch who attended the briefing yesterday, said he believed that the three companies would work out a settlement. Part of his rationale is that G.M. is motivated to avoid disruptions because it has a wave of redesigned large S.U.V.'s and pickup trucks coming to market next year and its large inventory has been slimmed down by its employee discount offers.

''I don't rule out a strike, it's possible, but I think there's a lot of motivation to avoid a strike,'' he said, adding, ''If they have a strike, there will be lots of lost sales and lots of lost market share.''

That said, the negotiations are unusual and unpredictable, because they come halfway into the union's four-year contract with G.M. and Delphi, and the union has said it will only offer concessions that are allowable within the framework of its contract. G.M. has lost $1.4 billion in the first half of the year and is facing challenges on several fronts at home.

Among its challenges is weakening demand for large S.U.V.'s.

Paul Ballew, G.M.'s chief industry sales analyst, said the company expected oil prices to decline from their current highs, but to remain over $50 a barrel for a couple years, adding that it was a ''fact we're wrestling with each and every day.''

''Large utility buyers, from an income standpoint, certainly have the wherewithal to weather that increase,'' he said. ''Having said that, there are other things that go beyond just the cold hard financial facts, such as the image associated with those higher price points and what that means in terms of the attitudes of our customers.''